The present invention relates to a system and method for risk assessment, and more particularly to a system and method for risk assessment in connection with insurance pool participation.
Risk assessment is a cornerstone of the insurance industry. An insurance company's success is based, in part, on its ability to accurately predict, assess, and thereafter assume risk. Assumption of too much risk may result in the insurance company not having enough reserve capital to cover its claims, while assumption of too little risk may result in unrealized business opportunities.
Risk assessment is particularly troublesome when it comes to catastrophic events, such as hurricanes, earthquakes, floods, tornadoes, blizzards, airplane and train accidents, and terrorist attacks. Other catastrophic events are of course possible. Catastrophic events are disproportionate and exceptional in circumstance, and are thus difficult for insurance companies to assess, much less guard against. Insurance companies are particularly vulnerable to the high number of insurer claims that a catastrophic event gives rise to.
A common industry response to a catastrophic event is to form an insurance pool—a collection of member insurance companies each contributing a predetermined amount of capital to the pool. The exact amount contributed by each participating member may be based on the member's market share, irrespective of the actual exposure suffered by the insurance company as a result of the catastrophic event. For example, if an insurance company maintains a 5% market share, then it would have to contribute to the pool 5% of the total claims arising from the catastrophic event, even though the insurance company was actually exposed to 1% of the casualties. Payout from the pool is ideally carried out in a uniform and distributed fashion, so that the costs or losses incurred by the members are less than the costs or losses that would be incurred without participation. Typically, payout is based on the insurance company's actual exposure. In theory, the pool enables the member companies to spread out the costs associated with the high number of claims resulting from the catastrophic event.
After the September 11 attacks in New York and Washington, D.C., however, the efficacy of insurance pools has been questioned. Many insurance companies formerly associated with such pools have withdrawn their participation in response to the heavy losses incurred. As a result, future insurance pools are likely to be formed with fewer participating companies, and are thus less attractive to potential participants. The situation is more pronounced in areas more susceptible to future terrorist attacks, such as Washington, D.C. and the northeast region of the country.
The new realities of insurance pools are such that insurance companies are more susceptible than ever to disproportionate losses, particularly from larger, more broad-based catastrophic events. Presently, however, there is no system or method whereby an insurance company may assess or determine the expected costs, benefits and/or risks that result from participating in an insurance pool.
These and other problems exist.